Back in the 1960s and 1970s a range of short, humorous books performed particularly well. They were designed to help you survive sophisticated conversations at dinner parties with just enough detail to hold your own, without having to do any serious reading.
They were ‘The Bluffer’s Guides’ and they’re still going strong, with such diverse topics as fishing, wine, the quantum universe and even Brexit. Curiously though, nobody ever wrote one on investment, which makes us wonder what such a book would look like. If we were to perform the lightest of surface skims on the world of investing, it’s a fair bet that the word ‘diversification’ would come up, eliciting knowing nods from around the table.
But it’s really important. Diversification is a key factor in building the right portfolio for you, one that will grow with you, respond to change and deliver the results you want over the long term. In part eight of our guide to balancing your personal and business financial health, let’s look at what it really means.
“If you invest and don’t diversify, you’re literally throwing out money.” – Jeff Yass
The ‘D word’ is often explained with analogies about eggs and baskets, or umbrellas and sunglasses, with the upshot being that it’s a healthy and sensible thing to do. It gives your portfolio a better chance of doing well when some areas of the market aren’t performing at their best (and just as importantly, it makes the most of opportunities when things are going well).
While it’s common sense that putting all your money in the same place is a risky approach, diversification works on more levels, which we need to work with and understand. For example, diversifying within your home markets or just in a focussed area, be it a sector or a geographical region, isn’t enough. If you place a net on top of an identical net, you’ll have two nets with similar holes in the same places. But layer different types of nets at different angles and eventually they’ll compensate for one another, plugging the gaps and creating a surface that, while not completely impregnable, is far more resilient.
Smart diversification means investing globally, across different sectors and in different types of assets. Crucially, it’s not something you ‘set and forget’. Diversification is an ongoing process that entails checking in with your wealth planner periodically to make sure the mix of assets in your portfolio is still appropriate for what you’re trying to achieve.
We definitely wouldn’t advocate micro-managing your investments – quite the opposite in fact – but this periodic rebalancing of your portfolio is important to keep it aligned to your goals. Ensuring that it’s spread across a range of companies in varying sectors and different parts of the world will give it a better chance of riding out market shocks. But diversification for its own sake isn’t the goal – the aim is diversification that fits with your goals.
Will this kind of considered diversification make sure your portfolio is immune to losses? No, of course it won’t. They’ll still happen, but diversification equips your portfolio to absorb those losses more readily and crucially, to recover from them more quickly.
Where Citywide can help
Diversification is a key part of your investment strategy, but just as your diet can be ‘varied’ without being ‘balanced’, the mix of assets in your portfolio needs to align with your ambitions and continue to do so throughout your investment journey.
At Citywide we begin every relationship by listening to what the client wants to achieve. And we keep listening, because we know that goals evolve, markets move and circumstances change.
Building and managing the right investment portfolio for you means making sure it’s a good fit now, but that it also keeps step with you in the years ahead.
If you’ve enjoyed reading this part of our guide to keeping your personal and business finances in shape, you can download our full guide, ‘10 actions successful business owners take to grow their personal wealth’ today.
If you’d rather read them one at a time, we’ll be posting all our tips for running a tight ship at home and at work, or you can [Link: opt in to email updates].